How compound interest can help your savings grow
We get it, interest isn’t the most interesting topic of conversation and you probably haven’t thought much about compound interest since high school maths. But having a good grasp on what compound interest is, and how a compound interest account can boost your savings, is something everyone should learn – future you will thank you for it.
What is compound interest?
It’s interest on interest. You make an initial deposit into something like a savings account. You earn interest which gets added to your deposit. Then, you can start earning interest on both your initial deposit and the interest you’ve been paid. The cycle continues and this becomes an ongoing, compounding amount.
Compound interest is different to simple interest. With simple interest, you will only get interest on your initial deposit into your account. You won’t get interest on the previous interest you’ve earned.
Here’s an example of compound interest
Let’s say you start with $500 and make a deposit of $500 every year over 10 years into a compound interest account that has an interest rate of 3.00% p.a.
Not only would you have saved a healthy $5,500 on your own, but you would have earned another $904 in compound interest.
When you’ve already got a decent chunk of savings, and you’re in the position to make higher contributions year on year, the compound interest becomes even more sizeable.
If you start out with $5,000 and make a deposit of $1,200 every year with the same interest rate over the same 10 years, you would have earned $3,476 in compound interest.
Time is on your side
Where compound interest really gets interesting is when you give yourself the gift of time and allow it to play a major role in your savings plan.
Take the most recent example, but extend the timeframe to 35 years, e.g. the average retirement age (65) for someone who’s just turned 30.
Over that time, you would have saved $47,000 as well as $39,624 of interest. That’s some significant savings to boost your overall retirement fund.
Compound interest is low effort
When it comes to investing, there are certainly other options including property, shares and stock. It’s all about personal choice and what you’re comfortable investing in. But, if you’re someone who likes to ‘set and forget’, rather than play the investment game, setting up a savings account with compound interest could be the low effort option you’re looking for.
Get started with a compound interest account ASAP
A key takeaway from the above examples is that you need to start as soon as you can. Whether your initial deposit amount is small or big, it’s all about getting time on your side and using that time, plus a commitment to regular deposits, to harness the power of compound interest.
Our Save account comes with a base interest rate plus bonus interest on balances up to $250K per customer when you deposit $200+ per month (not including internal transfers) into any of your Spend, Bills or Save accounts. As long as you’ve deposited $200+ in either your Spend, Bills or Save account, you’ll still be eligible for our bonus interest even if you take money out of your Save account during the month. You can get set up in minutes and begin compounding interest today.